6 November 1995 External T.I. 9523015 - RECEIVABLES ON WINDING UP OF FARMING PARTNERSHIP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Winding up of a farming partnership under 85(3), 98(3) or 98(5) where the section 28 election has been made. Are the trade receivables to be included in the partnership's income for its final fiscal year.

Position:

No. Partnership to include in its income only amounts received or deemed received in the course of carrying on business.

Reasons:

Income calculated according to the cash method as provided at section 28.

			5-952301
XXXXXXXXXX	M. Shea-DesRosiers

Attention: XXXXXXXXXX

November 6, 1995

Dear Sir/Madam:

Re: Application of Subsections 28(1), 85(3), 98(3) and 98(5) of the Income Tax Act (the "Act")

This is in reply to your letter of August 17, 1995 wherein you request our opinion on the winding up of a farming partnership under the provisions of either subsections 85(3), 98(3) and 98(5) of the Act where the farming partnership has made the election under section 28 of the Act to compute farming income on the cash basis. You ask whether, if there are trade receivables outstanding at the time of the winding up, they should be included in the partnership's income for its final fiscal year. We apologize for the delay in replying to your letter.

We have assumed that for the purpose of our analysis that the trade receivables do not constitute capital property for the partnership.

Subsection 98(3) of the Act applies where a Canadian partnership ceases to exist and all of the partnership property has been distributed to the partners and subsection 98(5) of the Act applies to a Canadian partnership that ceases to exist and one of the partners carries on alone the business previously carried on by the partnership.

It is our opinion that the partnership is deemed pursuant to paragraphs 98(3)(f)and (5)(f) of the Act to have disposed of its trade receivables for proceeds of disposition equal to its cost amount. However, these paragraphs do not deem the proceeds of disposition to have been received by the partnership. According to the definition of "cost amount" at subsection 248(1) of the Act, the cost amount of the trade receivables corresponds to the amount of the trade receivables. However, even if the partnership is deemed to have disposed of its trade receivables, its income must be calculated according to the rules contained in sections 28 and 96 of the Act. According to the cash method provided at section 28 of the Act, the partnership must include in the calculation of its income the amounts received or deemed received in the course of carrying on its business.

As mentioned at paragraph 10 of Interpretation Bulletin IT-433R, where a taxpayer who reports income from a business on a cash basis disposes of, or ceases to carry on, all or part of the business, the amount received for the accounts receivable that would have been income is income to the taxpayer in the year of receipt pursuant to subsection 28(5) of the Act. This is income whether it is received from the sale of a business as a going concern, or from the separate sale or later collection of the accounts receivable.

We fail to see your problem concerning subsection 85(3) of the Act since, pursuant to paragraph 85(3)(c) of the Act, immediately before the winding-up there is no partnership property other than money or property received from the corporation as consideration for the disposition.

We trust the above comments will be of assistance to you. However, said comments do not constitute advance rulings and, as mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, they do not bind the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch